The made-in-China fallacy

Contrary to popular belief, Chinese imports support US jobs, writes Terry Miller of the Heritage Foundation

The made-in-China fallacy

Monday, January 14, 2013

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Ambassador Terry Miller is director of the Center for International Trade and Mark A. Kolokotrones Fellow in Economic Freedom at The Heritage Foundation.

Conventional wisdom says that exports are beneficial and imports are harmful. Conventional wisdom is wrong.

Concern over the size of the US trade deficit, for example, is based on a misconception of the way trade affects economic activity. A key element of this misconception is the mistaken idea that imports into a country cost jobs there. In fact, increased economic activity associated with every stage of the import process helps support jobs – a lot of them, as a longer paper by The Heritage Foundation shows.

Advocates of free trade have established that imports provide choices that increase individual and national prosperity. These benefits do not come at the cost of employment, and government officials should not be fooled by claims of net jobs lost due to imports. Policy-makers can bolster their economies as well as increase employment by moving away from protectionism and toward trade liberalization. In particular, the idea that millions of American jobs have been lost to China relies on bad trade numbers, bad economics and a fictional view of the world.

Trade in the real world

According to the Census Bureau, the US imported US$382 billion of goods from China in 2010, almost one-fifth of total American imports that year. Some argue that huge volumes like this mean the US has lost millions of jobs to China. There are different variations of this argument, and all fatally flawed. They rely on misleading statistics, misunderstand the crucial impact of choice and competition, or confuse the impacts of recent trade with a single country (usually China) with the multi-generation process of globalization and improvements in productivity.

The first flaw, as has become widely known, is with trade data. The way trade is almost always measured gives full credit to the country that sends the final shipment: The full value of a computer exported from China counts in Chinese trade volume, though typically only the manual assembly of the parts occurs there. The value added by China’s economy is tiny, as are the workers’ salaries. Yet China gets credit for the entire process in trade accounts.

This method of measurement ignores the fact that imports, including those into the United States, can start their lives as American intellectual property or components that are then modified or assembled overseas. The US is the world leader in the creation of intellectual property, in product design and in financing. High-quality American jobs are created in the early stages of what can subsequently become import transactions, which are then wrongly said to lower net American employment. That such activities create good jobs in the US is almost universally accepted, but it is still often lost in policy discussions.

Protectionists do not advocate the use of faulty statistics. But they do have a faulty understanding of economics. The availability of more choices, usually at a lower price, in the form of imports allows consumption to be higher than it otherwise would be. Even more important, the competitive pressure from imports improves the quality of goods and services.

That competition encourages further consumption. If China stopped exporting television sets, there would be fewer choices and less competition. The price of TVs would rise and the quality would fall. Americans and others would buy fewer TVs and production of TVs would then decline, everywhere. The ultimate logic of protectionism is to make everyone a loser.

Some criticism of free trade goes even a step further. It implicitly attributes all the effects of technological change and increasing globalization to a trade deficit with one country.

This was done in the 1970s and 1980s when Japan was cast as a villain for competing with the US and Europe. Economic change can certainly cause short-term dislocations, particularly in the job market. But over the course of a few years, Japanese competition spurred innovation and boosted productivity, leading to a much healthier American economy with more and better-paying jobs. Now that the Japanese economy has fallen on hard times and is no longer a convenient scapegoat, China has become the prime target of American protectionists.

Those who attack China often do not examine real economic events: They do not measure actual failed businesses and actual job losses. Instead, they assume the large US-China trade deficit means that both production and jobs are moving from the US to China.

If this were true, many jobs would have moved back to the US from China when the bilateral deficit fell by more than US$30 billion in 2009. Of course, no jobs actually moved. Instead, millions of jobs were lost, due not to trade flows, but simply because of economic contraction during the financial crisis.

Imports and jobs in a new light

The positive impact of imports on jobs can be seen clearly in the relationship between the level of imports and the unemployment rate over the past 30 years: When imports increase, the unemployment rate goes down, not up. The likely explanation is that economic growth is driving both results – growth leads to more imports and simultaneously lowers unemployment. When growth collapses, as it did in 2009, imports weaken and unemployment rises. Imports do not cause unemployment; quite the opposite, they are a signal of prosperity and plentiful jobs.

Protectionists conveniently disregard activities that add value to a country’s economy and that apply equally to imports and exports – such as port loading, internal transport, wholesale trade, retail trade, advertising and after-market service. It is no help to policymaking to imagine what might happen if all goods Americans buy from China were suddenly produced here. This ignores the trade, investment and business development that have contributed so much to world living standards.

A more useful analysis embraces the world as it really works – in which imports undeniably support jobs. Based on our analysis of data from the Census Bureau and the North American Industry Classification System, imports of apparel from China alone supported 355,000 jobs in the US in 2010. Imports of toys and sporting goods from China supported approximately 221,000 jobs in the United States. The longer version of this paper, available at The Heritage Foundation website, provides the calculations that demonstrate these gains.

Because exports and imports both support jobs, it follows that the best measurement of how trade affects employment is the amount of combined trade flowing in and out of the country. It makes little sense to focus on whether imports or exports are larger – whether there is a trade deficit or surplus – when both are having a positive impact.

The US and others therefore should resist laws and regulations that restrict imports and adopt policies that encourage liberalization of trade in both directions. They should also stop using the trade deficit to show the effect of trade on employment: Total trade volume is a far better indicator.

Understanding the positive role of imports in particular is critical to healthy trade policy and thus to bolstering the economy. Buying imports does not mean that jobs are exported to foreign nations. On the contrary, imports can create jobs from the port to the sales floor. The voluntary trade of dollars for goods is agreed upon millions of times every year because it benefits both parties to the transaction. And workers share intensely in those benefits.

Derek Scissors, Asia economist at The Heritage Foundation, contributed to this article. An expanded version of this article with data is available at the foundation’s website.